SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-21949
----------------
SAFELITE GLASS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3386709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1105 SCHROCK ROAD, COLUMBUS, OHIO 43229
(Address, including zip code of principal executive offices)
(614) 842-3000
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or Section 15(d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
As of July 3, 1999 there were 3,414,345 shares outstanding of
Safelite's Class A Common Stock ($.01 par value) and 10,412,638 shares
outstanding of Safelite's Class B Common Stock ($.01 par value).
<PAGE>
SAFELITE GLASS CORP.
Form 10-Q
For the Quarter Ended July 3, 1999
INDEX
Page No.
Part I. Financial Information
- ------------------------------------
Item 1. Financial Statements
Condensed Balance Sheets - July 3, 1999 and April 3, 1999... 2
Condensed Statements of Operations - Three Months Ended
July 3, 1999 and July 4, 1998........................... 3
Condensed Statements of Cash Flows - Three Months Ended
July 3, 1999 and July 4, 1998........................... 4
Notes to Condensed Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................5 - 8
Part II. Other Information
- --------------------------------
Item 6. Exhibits and Reports on Form 8-K............................ 9
-1-
<PAGE>
PART I.
ITEM 1. Financial Statements
SAFELITE GLASS CORP.
CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
July 3, 1999 April 3, 1999
------------ -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ........................................ $ 1,554 $ 2,876
Accounts receivable, net of allowance for
uncollectible accounts of $5,274 and $5,100 76,929 70,296
Inventories ................................. 54,974 50,451
Other current assets ........................ 17,555 20,003
--------- ---------
Total current assets ............... 151,012 143,626
PROPERTY, PLANT AND EQUIPMENT - net of accumulated
depreciation of $67,474 and $64,172.......... 64,011 64,080
INTANGIBLE ASSETS - net of accumulated amortization
of $23,505 and $21,039 ...................... 278,337 280,814
OTHER ASSETS ..................................... 82,388 85,307
--------- ---------
TOTAL ASSETS ..................................... $575,748 $573,827
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................ $ 61,047 $ 50,305
Current portion - long term debt ............ 3,464 4,537
Accrued expenses ............................ 31,107 29,457
Accrued interest ............................ 1,165 6,589
--------- ---------
Total current liabilities .......... 96,783 90,888
LONG-TERM DEBT - LESS CURRENT PORTION ............ 476,414 482,846
OTHER LONG-TERM LIABILITIES ...................... 6,716 6,627
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Series A preferred stock issued, $0.01 par value 1 1
8% Non-voting preferred stock issued, $0.01 par value 1 1
Class A common stock issued, $0.01 par value 38 38
Class B common stock issued, $0.01 par value 104 104
Additional paid-in capital .................. 374,877 374,877
Accumulated deficit ......................... (373,718) (376,087)
Other ....................................... (5,468) (5,468)
--------- ---------
Total stockholders' deficit ............. (4,165) (6,534)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ...... $575,748 $573,827
========= =========
See notes to condensed financial statements.
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<PAGE>
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended
July 3, 1999 July 4, 1998
------------ ------------
SALES:
Installation and related services ........... $ 227,872 $ 227,058
Wholesale ................................... 11,223 14,109
--------- ---------
Total sales ............................. 239,095 241,167
COST OF SALES:
Installation and related services ........... 163,339 159,454
Wholesale ................................... 9,352 11,278
--------- ---------
Total cost of sales ..................... 172,691 170,732
--------- ---------
GROSS PROFIT ..................................... 66,404 70,435
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 49,232 47,474
RESTRUCTURING EXPENSES ........................... 3,509
OTHER OPERATING EXPENSES ......................... 985
--------- ---------
OPERATING INCOME ................................. 17,172 18,467
INTEREST EXPENSE ................................. (11,458) (11,187)
INTEREST INCOME .................................. 88 137
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAX PROVISION ........................ 5,802 7,417
INCOME TAX PROVISION ............................. (3,433) (3,968)
--------- ---------
NET INCOME ....................................... $ 2,369 $ 3,449
========= =========
See notes to condensed financial statements.
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<PAGE>
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
July 3, 1999 July 4, 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 2,369 $ 3,449
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................. 5,810 6,041
Deferred income taxes ......................... 3,433 3,968
Loss on disposition of assets ................. 20 12
Changes in operating assets and liabilities:
Accounts receivable ......................... (6,633) (8,235)
Inventories ................................. (4,523) (3,904)
Accounts payable ............................ 10,742 9,164
Accrued expenses ............................ 2,438 (5,144)
Restructuring reserves ...................... (1,154) (3,742)
Accrued interest ............................ (5,424) (2,803)
Other ....................................... 2,821 (639)
-------- --------
Net cash flows provided by (used in)
operating activities....................... 9,899 (1,833)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................... (3,627) (4,255)
Proceeds from sale of fixed assets ............ 4 13
-------- --------
Net cash flows used in investing activities . (3,623) (4,242)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings .............. (1,498) (1,551)
Borrowings (payments) on revolver, net ........ (6,100) 6,170
-------- --------
Net cash flows provided by (used in)
financing activities....................... (7,598) 4,619
-------- --------
NET DECREASE IN CASH ............................. (1,322) (1,456)
CASH AT BEGINNING OF PERIOD ...................... 2,876 10,254
-------- --------
CASH AT END OF PERIOD ............................ $ 1,554 $ 8,798
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ........................ $ 16,416 $ 13,353
========= =========
Cash paid for income taxes .................... $ 216 $ 312
========= =========
See notes to condensed financial statements.
-4-
<PAGE>
SAFELITE GLASS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
These interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the
data for these periods. The interim financial statements should
be read in conjunction with the audited financial statements and
notes thereto contained in Safelite's Report on Form 10-K for the
fiscal year ended April 3, 1999. Safelite's results for interim
periods are not normally indicative of results to be expected for
the fiscal year. Safelite's business is somewhat seasonal, with
the first and fourth calendar quarters of each year traditionally
being its slowest periods of activity. This reduced level of
sales combined with the Company's operating leverage has
historically resulted in a disproportionate decline in operating
income during the first and fourth calendar quarters of each
year. The severity of weather also has an impact on Safelite's
sales and operating income, with severe winter weather generating
increased sales and income and mild winters generating lower
sales and income.
Preference Dividends - At July 3, 1999, cumulative unpaid
preference dividends totaled $5.1 million.
Comprehensive Income - Comprehensive income was equal to net
income for the three months ended July 3, 1999 and July 4, 1998.
Segments - Safelite has determined that it operates in two
industry segments: installation and related services and
wholesale. Safelite does not allocate assets or overhead by
segment.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales. Sales for the quarter ended July 3, 1999, decreased $2.1 million, or
0.9%, to $239.1 million, from $241.2 million in the quarter ended July 4, 1998.
Installation and related services sales of $227.9 million for the first quarter
remained virtually even with same period of the prior year, despite a 7.7%
increase in unit sales. The increase in unit sales was offset by lower overall
industry pricing levels as compared to the first fiscal quarter of 1999, when
there was a significant industry-wide price increase which subsequently
dissipated.
Wholesale sales for the quarter ended July 3, 1999, fell 20.5% to $11.2 million
as a result of a decline in unit sales. These results reflect both a strategic
move by Safelite away from less profitable truckload sales, as well as a shift
towards greater use of Safelite manufactured product in service center
locations.
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<PAGE>
Gross Profit. Gross profit for the quarter ended July 3, 1999, decreased 5.7% to
$66.4 million, from $70.4 million in the prior year quarter. Gross profit rate
decreased to 27.8% as compared to 29.2% in the quarter ended July 4, 1998,
due primarily to a higher percentage of network business relative to total
sales. The gross profit margin on network sales is substantially lower than on
work performed through Safelite owned service centers. Also contributing to
margin compression was lower industry-wide pricing which more than offset lower
product costs and increased service center productivity levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.8 million, or 3.7% in the first quarter to
$49.2 million. As a percentage of sales for the quarter ended July 3, 1999,
selling, general and administrative expenses increased to 20.6% from 19.7% in
the quarter ended July 4, 1998. The increase in selling, general and
administrative expenses is primarily attributable to commencement of a new
national cable TV advertising program and increased staffing in our national
call centers to support recent Master Provider program wins.
Restructuring Expenses. Safelite recorded $3.5 million in restructuring expenses
and $1.0 million in one-time integration costs during the quarter ended July 4,
1998 as a result of consolidation and integration activities associated with the
December 19, 1997 merger with Vistar. These activities were completed in fiscal
year 1999.
Income Before Income Taxes. Income before income taxes decreased to $5.8 million
in the first quarter from $7.4 million in the first quarter of the prior year.
This is attributable to the lower gross profit and increase in expenses
described above, partially offset by the $4.5 million in restructuring charges
and one-time integration costs included in income before income taxes in the
quarter ended July 4, 1998.
Income Taxes. For the quarters ended July 3, 1999 and July 4, 1998, Safelite's
provision for income taxes was significantly above income taxes computed using
statutory rates primarily due to non-deductible amortization of goodwill arising
from the Vistar merger.
Net Income. Net income for the quarter ended July 3, 1999, was $2.4 million,
down from $3.4 million in the quarter ended July 4, 1998. The decrease in net
income from fiscal 1999 was primarily due to the changes in income before income
taxes described above.
Year 2000 Issues
Many computer systems in use today may be unable to correctly process data or
may not operate at all after December 31, 1999 because those systems recognize
the year within a date only by the last two digits. Some computer programs may
interpret the year "00" as 1900, instead of as 2000, causing errors in
calculations or the value "00" may be considered invalid by the computer
program, causing the system to fail. Year 2000 issues may affect (1) Information
Technology (IT) utilized in Safelite's widely diversified business information
systems, including mainframe and client server hardware and software
communications and point of sale equipment (IT Systems); (2) non-IT systems
utilized by Safelite, such as communications, facilities management, and
manufacturing and service equipment containing embedded computer chips; and (3)
IT and non-IT systems of third parties relied on by Safelite, such as customers,
suppliers, distributors, banks and utilities.
-6-
<PAGE>
Safelite could be adversely affected if Year 2000 issues are not resolved by
Safelite or material third parties before the Year 2000. Possible adverse
consequences include, but are not limited to (1) the inability to obtain
products or services used in business operations, (2) the inability to transact
business with customers, (3) the inability to execute transactions through the
financial markets, and (4) the inability to manufacture or deliver goods or
services sold to customers. Safelite's management believes that at least some
minor disruptions due to Year 2000 issues will occur. On a worst case basis, if
Safelite, one or more of its significant customers or suppliers, or key
government bodies are unable to implement timely and effective solutions to the
Year 2000 issues, Safelite could suffer material adverse effects. The financial
impact of these effects cannot currently be estimated.
Safelite relies heavily on computer technologies to operate its business. As a
result, Safelite continuously seeks to upgrade and improve its computer systems
in order to provide better service to its customers and to support the Company's
growth. Safelite has initiated a program to prepare its computer systems and
applications to accurately process date/time data from, into, and between the
years 1999 and 2000. As part of this program, a team has been assigned to assess
the nature and extent of the work required to make Safelite's IT Systems and
non-IT Systems Year 2000 compliant.
The assessment and remediation phases of the Year 2000 project are complete for
all critical systems. Implementation and testing is underway and is scheduled to
be complete by August 1999. Remediation of systems and applications software has
been effected through outside consultants, "factory support", in-house staff and
in some cases by the replacement of software packages. Safelite has built an
isolated test environment where systems are being tested by resetting dates to
various points beyond the year 2000. Management expects that by the end of
calendar 1999, all of Safelite's critical systems that are not currently Year
2000 compliant will be corrected or replaced.
Surveys of critical customers and suppliers are currently underway to assess the
status of their Year 2000 compliance efforts. However, there can be no assurance
that the systems of other companies on which Safelite relies will be timely
converted. There can be no assurance that Year 2000 failures experienced by
Safelite or third parties will not have a material adverse effect on Safelite's
financial condition and operations. Safelite has begun consideration of
contingency plans to deal with Year 2000 issues in the event that remediation
efforts were unsuccessful. These plans are being more fully developed throughout
1999 to address specific areas of need.
Based on Safelite's latest assessments, the total cost of addressing the Year
2000 issue is estimated to be in the range of $2.0 million to $3.0 million, with
the majority of these costs representing incremental business costs to outside
vendors and consultants. As of July 3, 1999, approximately $1.3 million of
external costs have been incurred. Safelite does not separately track the
internal costs for the Year 2000 project, with these costs being principally the
related payroll costs for the management information systems staff.
-7-
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities for the three month period ended July
3, 1999 was $9.9 million, an increase in operating cash flows of $11.7 million
from the same period of the prior year. The increase in operating cash flow has
resulted mainly from decreased working capital and decreased restructuring
requirements in the current year.
Safelite's investing activities consist mainly of capital expenditures for new
and existing service center and warehouse locations, capacity and efficiency
upgrades to manufacturing facilities, as well as information technology
equipment. Capital expenditures totaled $3.6 million and $4.3 million for the
quarters ended July 3, 1999, and July 4, 1998, respectively.
Safelite relies on internally generated funds and, to the extent necessary, on
borrowings under its revolving credit facility to meet its liquidity needs. As
of July 3, 1999, Safelite had long-term borrowings of $479.9 million and
availability under the revolving credit facility of $54.9 million.
The ability of Safelite to operate its business, service its debt service
obligations and reduce its total debt will be dependent on the future
performance of the Company which, in turn, will be subject to general economic
conditions and to financial, business, and other factors, including factors
beyond Safelite's control. A portion of Safelite's debt bears interest at
floating rates; therefore, its financial condition is and will continue to be
effected by changes in prevailing interest rates. Safelite uses interest rate
exchange agreements to manage exposure associated with interest rate
fluctuations. An increase of 1% in interest rates would have the effect of
increasing annual interest expense by approximately $1.7 million based upon
Safelite's quarter ended July 3, 1999 borrowing levels.
Forward-Looking Statements
Readers are cautioned that there are statements contained in this report,
including but not limited to those under the caption Year 2000 Issues, which are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include
statements which are predictive in nature, which depend upon or refer to future
events or conditions, which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", or similar expressions. In
addition, any statements concerning future financial performance (including
future revenues, earnings or growth rates), ongoing business strategies or
prospects, and possible future Company actions, which may be provided by
management are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and projections
about future events and are subject to risks, uncertainties, and assumptions
about the Company, economic and market factors and the industries in which
Safelite does business, among other things. These statements are not guaranties
of future performance and Safelite has no specific intention to update these
statements.
These forward-looking statements, like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or anticipated. The risks and uncertainties include product
demand, regulatory uncertainties, the effect of economic conditions, the impact
of competitive products and pricing, changes in customers' ordering patterns and
costs and expenses associated with any Year 2000 issues associated with
Safelite, including updating software and hardware and potential system
interruptions. This list should not be construed as exhaustive.
-8-
<PAGE>
PART II.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
Exhibit 27 -- Financial Data Schedule
2. Reports on Form 8-K
There were no reports on Form 8-K filed during the
three months ended July 3, 1999.
-9-
<PAGE>
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